-- Posted by Neil H. Buchanan
Three days ago, my Dorf on Law post
focused on an odd controversy regarding how people say they will
respond to the potential tax increases on the wealthy that might soon
become reality in this country. With many conservatives still surprised
by the (completely predictable -- and accurately predicted) re-election
of President Obama, apparently more than a few are now in panic mode.
They are certain that Obama will somehow get a big tax increase enacted
into law, and they are promising to react badly if he does.
In
some ways, this is reminiscent of the last, worst argument that
supporters of the now-forgotten Romney/Ryan ticket offered earlier this
month, the essence of which was: "Vote for Romney, because we're going
to be even more obstructionist if Obama wins a second term. At least something
will get done with Romney in the White House." Many commentators
rightly denounced that threat as tantamount to blackmail. Similarly,
the wealthy supporters of the losing side in the election are now saying
something like this: "Forget about Congress. We'll sink the whole economy by refusing to earn slightly reduced profits and incomes, if you try to tax us."
Most
of the don't-touch-our-high-incomes pronouncements have been coming
from reasonably high profile people, such as the CEO of a pizza chain
who continues to complain about tax increases in the Affordable Care
Act. (What is it about pizza chain guys that makes them crazy?)
These people directly hold the economic fates of at least several
thousand people in their hands; so even if their threats are morally
indefensible, at least we can see why they draw attention. The New York Times article
that I discussed on Monday, however, became infamous because it
included an interview with a chiropractor whose income is currently
(according to her) just below the $250,000 magic cutoff that Obama has
set for any tax increases. Her message was, basically, that she and her
business partner (who is also her husband) will stop working as soon as
their income hits the tax-increase threshold.
In one
sense, this counts as a big "so what?" She and her husband are
threatening, in essence, to furlough themselves without pay. Yes, that
could show up in a lower Gross Domestic Product, as they would provide
fewer spinal adjustments, and as any reduced spending on their part
multiplied through the economy. On the other hand, if their clients go
to other chiropractors, or simply spend their money on other goods and
services, then there might be no net effect at all.
As I
explained on Monday, however, the article became infamous because some
left-leaning news sources picked it up as an example of how the supposed
non-moochers do not even understand how taxes work. The argument, from
people like Rachel Maddow, was that the chiropractors in question were
making a basic logical error, confusing marginal tax rate changes with
average tax rate changes. I argued, in an indifferent sort of way, that
that conclusion was not supported by the record.
The
question comes down to this: When this person said that she will stop
working as soon as her income reaches $250,000, if Obama succeeds in
increasing the marginal tax rate for people like her from 33% to
something like 36%, did she mean: (a) "If the tax rate rises to 36% at
$250,001, then I'll actually be worse off by grossing $251,000 (netting
$160,640) than if I stay at $250,000 (netting $167,500)," or (b) "If the
tax rate rises by 3%, I will stop working, because it is worth the
effort to gross an extra $1000 if I end up with $670, but it's not worth
it if I end up with $640." If the answer is (a), then she is truly
confused (on several grounds, actually, because her current 33% rate
does not even apply to her full income, so that her net pay is much
higher than $167,500).
Nothing in the article
definitively tells us whether the answer is (a) or (b). My listless
defense, however, should not be viewed as a statement that it would
somehow make sense for this couple to actually stop working under the
assumptions described here. Part of the reason that Maddow and others
assumed that the answer was (a), I suspect, is that answer (b) actually
seems more silly. Even if the taxpayer in question is fully cognizant
of how marginal tax rates work, it just seems utterly implausible that
we are talking about tax changes that are sufficiently large to cause
people to stop working. It might be theoretically plausible that (b) is
at work, but in some ways it actually seems more generous to say that
these people are ignorant of how taxes work than to assume that they
would actually change their behavior on the margin because of the
difference of $30 take-home on a thousand dollars of extra income.
In
some ways, therefore, we are trying to figure out how to explain
real-world behavior, in light of two issues: (1) Standard economic
theory confidently predicts behavioral changes based on rational actors'
responses to clearly understood changes in incentives, and (2)
Statistical evidence suggests that people do not, in fact, respond to
changes in after-tax rates of return, in most circumstances. On the
latter point, for example, I noted in a Verdict column earlier this year
that public finance economists are starting to acknowledge that even
large changes in marginal tax rates (for example, in capital gains) are
apparently uncorrelated with any of the effects predicted by our models.
After I wrote my post on Monday, I saw that Warren Buffett had published a new op-ed in the Times
that same morning. Buffett, who continues to engage in "class
betrayal" by arguing for increases in taxes on investors and wealthy
people like himself, argued that investors simply do not think about tax
rates when they consider whether to put their money into promising
deals. He repeated that sentiment the same evening on The Daily Show With Jon Stewart.
Buffett
might have been making one of two arguments, along the lines of (a) and
(b) above. Either investors simply do not think about tax rates,
because they are after the big score, or they think about rates, but
they are satisfied with the rate of return on their investments -- even
when, as was the case earlier in Buffett's career, tax rates were much,
much higher than they are today.
On the flipside of
this type of claim, I once had a conversation about estate taxes with a
prominent public finance economist. He said that estate taxes surely
discouraged people from amassing large estates. I pointed out that none
of the studies of the estate tax had found such an effect. He
responded that it simply must be true that the estate tax has
that effect, because it makes no sense for it not to do so. In short,
he did not respond to me by saying that he had seen other studies that
contradicted my assertion. He simply said that his theory had to be
right, because it made sense to him. (He then accused me of favoring a
tax system that would "fit in well in North Korea," but that is a
different story.)
In short, even though it is possible
to defend the economic rationality of people who might quit working (or
reduce their efforts) in response to tax rate increases, that is rather
thin gruel. We have a body of evidence that shows that, even if we view
the evidence in the light most favorable to the chiropractors in
question (and others like them), the big tax freak-out can only come
about if higher-income taxpayers begin to act in ways that is either
directly against their interests, or is inconsistent with the way that
they have defined their interests in the past (that is, that is
inconsistent with their responses to tax changes in other
circumstances). Along the lines of an argument that I made on Monday,
that latter possibility is most consistent with the idea that wealthy
people's utility functions include a variable that we might called
"Obama Hatred."
If there is a sudden change in how
wealthy people respond to tax changes, therefore, we will know that they
really are willing to harm other people to spite a man whom they
despise. They might say that they are "merely responding to
incentives," but that merely puts a bland label on an ugly truth.
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